PF and ESI employee contribution deductible u/s 36(1)(va) if paid before return due date u/s 139(1)

The ITAT Jaipur allowed the assessee's appeal, holding that employees' contributions to PF and ESI deposited after the statutory due dates but before the due date for filing the return u/s 139(1) are allowable deductions for AY 2019-20. It held that the amendments to s.36(1)(va) and s.43B by the Finance Act 2021, as per the Memorandum, are expressly prospective from 1 April 2021 and apply only from AY 2021-22 onwards. Consequently, the adjustment made by CPC u/s 143(1) disallowing such contributions was unsustainable and directed to be deleted.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether employees' contribution to EPF/ESI, deposited after the due dates under the respective welfare statutes but before the due date for filing the return of income under section 139(1), is allowable as deduction under sections 36(1)(va) and 43B.

1.2 Whether the Explanations inserted to sections 36(1)(va) and 43B by the Finance Act, 2021 apply retrospectively to earlier assessment years, including the impugned year.

1.3 Whether disallowance of employees' contribution to EPF/ESI, in these facts, can validly be made as a prima facie adjustment while processing the return under section 143(1).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of employees' contribution to EPF/ESI deposited before the due date under section 139(1)

Legal framework (as discussed)

2.1 The Court examined sections 36(1)(va) and 43B of the Act, and the judicial interpretation by the jurisdictional High Court holding that where PF/EPF/ESI/CPF/GPF contributions are paid after the due date under the respective Acts but before the due date of filing the return under section 139(1), no disallowance can be made under section 43B read with section 36(1)(va).

2.2 The Court relied on the series of binding decisions of the jurisdictional High Court, including the decision in which it was held that section 43B, starting with a non obstante clause, overrides section 36(1)(va), and that contributions actually paid on or before the due date of filing the return under section 139(1) are allowable.

Interpretation and reasoning

2.3 It was undisputed on facts that the assessee deposited the employees' contribution towards EPF/ESI after the due dates prescribed under the respective Acts but before the due date for filing the return of income under section 139(1).

2.4 The Court followed its earlier detailed decision in a similar matter (employees' contribution to PF/ESI deposited before the section 139(1) due date) where, relying on the jurisdictional High Court's rulings, it had held that such contributions, though delayed under the welfare statutes, are not disallowable if paid before the section 139(1) due date.

2.5 It reiterated that, in the presence of divergent views of different High Courts, the decisions of the jurisdictional High Court are binding on the Assessing Officer and appellate authorities within that jurisdiction and must be followed in preference to contrary non-jurisdictional High Court views.

Conclusions

2.6 Since the employees' contribution to EPF/ESI was deposited before the due date of filing the return under section 139(1), the disallowance under section 36(1)(va) read with section 43B was not sustainable.

2.7 The addition made on account of such disallowance was directed to be deleted.

Issue 2: Temporal applicability of the Finance Act, 2021 amendments to sections 36(1)(va) and 43B

Legal framework (as discussed)

2.8 The Revenue relied on the Explanations inserted to section 36(1)(va) and section 43B by the Finance Act, 2021 and contended that these were clarificatory/declaratory and therefore applied retrospectively, thereby mandating disallowance for any delay beyond the statutory due date under the respective welfare laws.

2.9 The Court examined the Memorandum explaining the provisions of the Finance Bill, 2021, particularly the express statement that "these amendments will take effect from 1st April 2021 and will accordingly apply to assessment year 2021-22 and subsequent assessment years."

Interpretation and reasoning

2.10 The Court held that, in view of the express language in the Memorandum and the statute specifying that the amendments take effect from 1 April 2021, they apply only prospectively from assessment year 2021-22 onwards.

2.11 The Court agreed with the reasoning of other Tribunal Benches (including the cited Bangalore decision) that these amendments, which impose liability/restriction on deduction, cannot be applied retrospectively in absence of a clear legislative mandate.

2.12 Given that the impugned assessment year in the decided earlier case was 2019-20, and in the present appeal it is prior to assessment year 2021-22, the Court found that the Finance Act, 2021 amendments could not govern the year under consideration.

Conclusions

2.13 The Explanations inserted by the Finance Act, 2021 to sections 36(1)(va) and 43B are applicable only from assessment year 2021-22 and subsequent years and have no application to the impugned assessment year.

2.14 The Revenue's contention that the amendments are clarificatory and retrospective in nature was rejected.

Issue 3: Validity of adjustment under section 143(1) in respect of employees' contribution to EPF/ESI

Legal framework (as discussed)

2.15 The disallowance in dispute arose as an adjustment made by the Centralized Processing Centre while processing the return under section 143(1), which was later confirmed by the appellate authority.

2.16 The Revenue argued that such disallowance constituted a valid prima facie adjustment under section 143(1)(a)(iv) because, post-amendment, the law was unambiguous that any delay beyond the due dates under the relevant statutes warranted disallowance.

Interpretation and reasoning

2.17 Following its earlier decision in a similar matter, the Court held that, in light of the binding jurisdictional High Court decisions allowing deduction where contributions are paid before the section 139(1) due date, an adjustment disallowing such amounts at the processing stage under section 143(1) is not in accordance with law.

2.18 Since the jurisdictional High Court has categorically held that payment before the section 139(1) due date suffices to allow deduction, any contrary adjustment under section 143(1) would run against that binding interpretation.

Conclusions

2.19 The adjustment made by CPC under section 143(1) disallowing the employees' contribution to EPF/ESI in these facts was held to be unsustainable.

2.20 The addition of Rs. 4,79,558/- made by way of adjustment under section 143(1) was directed to be deleted, and the appeal was allowed.

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